78603 The Challenges to Small Caribbean Ports Are there lessons to be learned from recent port reforms in Africa? June 2013 1 Authors: This material has been prepared by Gylfi Palsson, Lead Transport Specialist in the Sustainable Development Department of Latin America and Caribbean Region at the World Bank. The Caribbean Knowledge Series is an occasional series that presents World Bank knowledge in an accessible format. It is meant to assist knowledge sharing across the region and trigger policy dialogue on topics relevant for the Caribbean This note was prepared to support the participatory policy dialogue in the context of the Caribbean Growth Forum (CGF). The CGF is an initiative facilitated by the Compete Caribbean Program, the Inter-American Development Bank, the World Bank and the Caribbean Development Bank, with the support of the Canadian International Development Agency, the United Kingdom’s Agency for International Development, CARICOM Secretariat, the University of the West Indies, the European Union and Caribbean Export. It aims to facilitate a multi-stakeholder dialogue to identify practical solutions for the growth challenge in the Caribbean. To learn more about the CGF methodology and progress in each Caribbean country visit: http://caribgrowth.competecaribbean.org/ Disclaimer: The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the Executive Directors of the International Bank for Reconstruction and Development / The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Visit the entire “Caribbean Knowledge Series� collection at: http://worldbank.org/lac Design & Concept by Room Grupo Creativo | www.room.com.do Cover Photo: ShutterStock 2 3 The Challenges to Small Caribbean Ports Are there lessons to be learned from recent port reforms in Africa? Smaller islands in the Caribbean are faced with Series of Epiphanies the very particular challenge, where the port is There were often extended periods where the gateway in and out of the country and a basic performance of the sector was gradually declining pillar for the economic wellbeing and future of the and commensurately there were rising concerns and country, and yet the ports are often the focus of demands for improving the situation. This starts in sometimes justifiable criticism for inefficiencies, the port and shipping community as genuine sector mismanagement, delays, high cost and maybe concerns, but often became political issue. Port even political patronage. And, oh yes, the traffic specific costs were occasionally an issue, but more through the port is in the global scheme of things generally it was the declining port performance very small, which in traditional thinking make it overall which was creating situations such as where questionable whether the ports would attract what shipping lines raised liner tariffs in response to longer is often viewed as the magic solution for improving wait and berth times and/or had to leave containers performance - concession of port operations under to catch up on schedules, customers had to wait long a landlord port management model to professional periods until their containers could be processed private terminal operators. and lack of investment in basic infrastructure In cases where an island wanted to address its prevented efficiency improvements – in sum, where specific port challenges, are there models to look lack of proper management was creating chaos in at, experiences to benefit from and lessons to learn port operations. The result was always the same: less from? and overall more costly port and maritime service for Most recent port reforms in Africa have been the country, creating a self-imposed and avoidable on comprehensive sector basis, where through barrier to the country’s trade. diagnostics and analysis, a holistic understanding of the challenges of the sector has been established. Change in any organization is difficult – often in ports This has led to port sector reform approach that it is made even more difficult because of the public tries to address the legal/regulatory, institutional service function of ports, public perception of ports and social/labor underpinnings of the sector; and as jewels of the economy, and often deep political is often accompanied with measures aimed at influence into management as well as strong union increasing the role and responsibility of the the role. It is therefore understandable that as criticism private sector in port operations. In some cases of port performance increases and goes beyond the terminals being concessioned were relatively complaints by the port community, that political effort small. Drawing on those experiences in Africa – is made to find the one or two actions that will turn both successes and in a handful of cases where the the situation around. Sadly, nearly all the time roots effort petered out along the way - this brief paper of the decline of the ports are deep and systemic and highlights some of the pertinent aspects from the requires a long term solution addressing the problem time it is realized that serious change is needed comprehensively. in the port sector until the time when change is indeed effected in the port and the sector. Some It is only when the realization starts taking hold among of these may be relevant to the experience in the the various stakeholders that something fundamental Caribbean port sectors. needs to be done about the situation in the port – this broad understanding that things need to change “Most recent port reforms in Africa have been on – that the country condition for starting to address comprehensive sector basis, where through diagnostics the problem is in place. The final and concluding and analysis, a holistic understanding of the challenges epiphany is when support to a fundamental change of the sector has been established. This has led to port in the port sector is given by the highest political sector reform approach that tries to address the legal/ regulatory, institutional and social/labor underpinnings authority. of the sector; and is often accompanied with measures aimed at increasing the role and responsibility of the In the Africa port reform experience, there is one private sector in port operations.� constant: where there was a high level of political 4 commitment to reform of the sector, it succeeded; consultation: in the initial stages of diagnostics the where there was lack of strong political will, the port Sierra Leone Port Authority essentially asked the sector reforms did not succeed. World Bank to be the honest broker in the initial discussions with the port labor unions. Diagnostics and Reform Design. In the Africa experience, nearly without exception, Frequently as the need for comprehensive port part of the reform solutions have been introducing reform is being digested among stakeholders, or restructuring involvement of private sector in diagnostics of the port issues take place, which one capacity or another in port operations. As help in developing and designing proper reform. a general rule, concessions should be in the last On occasions this diagnostic work only takes place stage of implementation: in Nigeria handover after political decision for change - depending on of concessions were delayed about 6 months the political space and circumstances at the time. because the Government had not concluded negotiations and agreements on compensations Such work – often supported by specialized to redundant labor. By the end of this diagnostic consultants - normally examines possible port and reform design phase, a clear set of objectives models to emulate, reviews and recommends for the reform need to be agreed on. changes to the legal and regulatory framework, organizational structure and role of port authority, Sometimes, the ports before reform were establishes benchmarked human resource excessively overstaffed - in some cases by factors of requirements, including to understand deviation up to 6 to 7 times what benchmarked staffing would from existing labor and skills with what would be be. Very obviously, such overstaffing had to be required under optimal situation and recommends addressed as part of a reform. An added dimension ways of addressing any discrepancies. sometimes was overly generous conditions of service (including pension obligations) which During both the diagnostic and reform design would have made cost of redundancies exorbitant phases a good practice is to undertake a number and indeed beyond capacity of port authorities of consultations. These not only better inform and governments to finance. the work and eventual reform, but also serve the purpose of informing stakeholders and easing into “In the Africa port reform experience, there is one constant: where there was a high level of political eventual implementation of the reform. However, commitment to reform of the sector, it succeeded; often the authorities are reluctant to undertake such where there was lack of strong political will, the port sector reforms did not succeed.� Where’s my silver bullet? Liberia came out of a 14 year civil war in 2004. Nigeria Presidential Decision As part of the peace agreement, control of Under World Bank funding (PPIAF) comprehensive the main port of Monrovia was handed to policy and planning recommendations for reform of one of the warring factions. Mismanagement, the Nigeria port sector was prepared in 2002, and inefficiencies, plunder and rule of the port as extensively discussed at political as well as technical a personal fiefdom resulted. A government level –however, there was no action or decision made elected in 2006 tried for two years different for the following two years while the country went one-off solutions (e.g. new board, port through an election cycle. management (several times), finance this one piece of equipment, and labor redundancies) President Obasanjo, newly reelected, made a decision all in the hope of improving the port in 2004 that Nigeria needed to revamp its port sector operations, but to no avail. Meanwhile the – at the time generally recognized around the world as World Bank advocated a comprehensive one of the worst performing one. In the following 30 solution to the problem. In 2008, a deep legal months or so, new port bill was drafted; envisioning and institutional reform process finally started, Port Authority split, restructured and reformulated; including preparation for concession. This redundancies with compensation affecting 25,000 small one million ton, 50 thousand TEU port staff and casual labor executed, and; 26 port terminals is now operated by one of the largest terminal concessioned. The lesson is that with good analytical operator in the world. underpinning and unwavering political commitment, The lesson is that there are no silver bullets – challenging port reform can be implemented quickly just clarity of agreed vision and hard work. even when confronted with competing interests. 5 As a consequence of the latter point, i.e. those traffic can be even lower and still attract interest and governments could not pay the stated benefits; competition for terminals by competent operators normally this led to extensive negotiations with - and to bout in a country that still had a high risk labor unions and eventual settlements. In the premium demand because of recent conflict. end, labor unions have their own epiphanies and understand why reform is needed and how those In that concession significant investment and may affect them. One labor leader stated to the operational obligations were placed on the writer of this paper during a 5 hour long discussion concession – indeed far beyond what normally with a group of about a dozen Nigerian union is seen in port concessions. Yet, through careful representatives: “We know the reform will go formulation of the concession, market sounding, through. We just want to hold out for the best deal tariff adjustments, and exceptionally well possible�. prepared concession process, this concession was successfully implemented and has now been in Well-designed redundancy packages do not only operation for a little over 2 years (see text box “The mean payments to labor; rather, it may include Monrovia Concession�). counseling and training, education grants, microcredits to establish new small enterprises While concession in larger ports follow familiar and other means especially designed to reduce path, there is no infallible formula or a cookie cutter the risk that the redundant labor falls into poverty. approach to concessions of smaller ports. While the design of the concession would be oriented The Holy Grail towards the particular needs of a port, each concession needs also to be designed accounting The legal, institutional and labor reform can for the potential limited interest of the market. be thought of as putting in place the needed Use of market sounding can be helpful, where the framework for well operating ports; sometimes preliminary design of the concession parameters accompanied by restructuring existing private are presented to a number of potentially interested sector involvement in port operations or in most concessionaires, and on basis of the market cases introducing private sector in port operations response the design of the concession is detailed hitherto served directly by the port authority. further. Existing and expected growth of natural throughput Discussion about the concession design or what of a port is important, as well as of course its will be concessioned, needs to be had, as well as transshipment potential, when formulating the clarity of what the objectives of the concession approach to concession. For instance, a port with ought to be; is the intent to get the greatest value 400,000 TEU throughput could be expected to for the concession, drive down costs, get the sustain two competing concessions (depending highest efficiency, attract investment, know how, of course on port space and configurations); the or any combination of these? Further, what type of question for smaller Caribbean ports would be concessionaire is desirable and with what profile? if there is a bottom limit on throughput where The concession process normally follows a path it becomes impossible to attract a traditional where due diligences for the concession are concession? The ambiguous answer is that it undertaken, resulting in a series of reports and depends. In the end, a concessionaire looks at opinions on aspects that may affect the concession, the expected profitability of operating a terminal. such as legal and regulatory, operational, technical In that evaluation the combination of volume of and engineering, equipment, institutional, human traffic, applicable tariffs and perhaps other reasons resources/labor, environmental and importantly such as vested interest in speeding up service of financial and creation of a financial model which own vessels comes to play. Some of the smallest will help in refining the concession design and volume terminals concessioned in Africa in past 10 tariff issues. On basis of the concession design and years have only had a throughput of about 50,000 informed by issues discovered and exposed in the TEU. But very recent example of such concession preparation of the due diligences, a formal request in Liberia may be an indication that the volume of for expression of interest is issued, sometimes 6 accompanied by a brief Information Memorandum. On basis of the responses and within the The Monrovia Concession The Liberia Government faces enormous established parameters of the request for EoI, challenges in rebuilding its basic infrastructure a shortlist of terminal operators will be invited to after decades of damage and neglect during a submit a proposal for the concession on basis of civil war. The 600 meters of berths at the main a Request for Proposals. To the extent possible, terminal in the Freeport of Monrovia were not selection criteria need to be quantitative so as to only approaching the end of their useful life ensure transparency in the process. (built in 1946); they were literally collapsing, with stretches non-operational due to failing strength integrity. The port throughput was In one case in Africa, the period of proposals built only one million ton (including in 50,000 TEU). in two rounds of comments on a draft contract In designing the “width and breadth� of which eventually would govern the concession. the concession the Government eventually This resulted in far fewer issues that eventually decided to go as far as possible in moving needed to be addressed at negotiations and operational and investment responsibility to a – importantly – tightened through the open concessionaire. Following an excellent process aimed at maximizing the benefit to the country, consultations with competing terminal operators eventual concession was signed with APM the technical, operational and procedural details Terminals, for (i) terminal operation covering of the concessions. This turned out to be an container and general cargo and (ii) tug exceptionally successful addition to the process. and pilot service. The investment obligation An inevitable issue raised in the process in the included all terminal equipment, new tugs concessions in Africa is how economic regulation and pilot boats and construction of a new 600 will be accommodated. For the most part meter quay. Reportedly, the investment alone was valued at US$120 million. independent economic regulatory agencies do The lesson learned is that a well elaborated not exist, which the concession contracts can refer and smart concession design can bring great issues related to tariff and its adjustments. In the benefits even to a small port. end, for the most part, the economic regulation is by the contract itself, i.e. the contract clauses described how to resolve these issues. In one case the government initiated steps to establish an independent transport commission which would regulate all transport tariffs. Conclusion There are a handful of lessons to be drawn from • If ports are overstaffed, labor issues need to African port reforms of the past years that reform be addressed; eventual solutions should to try to minded stakeholders in the Caribbean may want ensure that redundant labor has an opportunity to to keep in mind. establish itself again economically. • Generally speaking, there are no silver bullet • When it comes to concession of small ports, there solutions. Proper reform most often requires is a need to design a concession around not only comprehensive actions addressing legal, the requirements of the port but also the realities institutional, labor and PPP aspects. of the market. • Without highest level political commitment, the • Well designed, transparent and competitive chance for successful reform is compromised. transaction process leads to better outcomes. • A careful understanding of the root causes of port inefficiencies needs to be developed and appropriate reform actions designed. • Stakeholder consultations in design and implementation of reforms improve and facilitate the actual process. 7 worldbank.org/lac 8